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Dissolving a Business: Terms You Should Know

Whether selling your business, breaking up a partnership, or shutting your business down completely, dissolving a business is complicated. Federal and state laws may require notice of dissolution for incorporated businesses and limited liability companies (LLCs). You may also need to notify creditors, partners, suppliers, other stakeholders, and contractors.

When a business closes, it triggers financial obligations for the business owners. There are several steps you must take before your business shuts down.

  • Notify all employees of the closure, and issue final paychecks. Business bank accounts must remain open until all paychecks have cleared.
  • Calculate the value of the remaining assets.
  • Pay all outstanding invoices to vendors and service providers. Cancel any repeating contracts.
  • Pay off all creditors and lenders. Make provisions for long-term loans and notes.
  • Final federal, state, and local taxes will be due the year following the dissolution. Coordinate with your accountant for payment when next year's tax forms are available.

Glossary of Terms for Shutting Down a Business

Shutting down or selling a business involves decisions by owners, the board of directors, shareholders, or even the courts. Federal and state regulations may come into play if a business has filed for bankruptcy or reorganization. Small business owners should know the legal terms used for selling or dissolving a business.

Administrative dissolution. Dissolution of a corporation by the state, usually by the Secretary of State, for such things as failing to pay taxes, delivering an annual report, or operating without a registered agent.

Articles of dissolution. The document that a corporation files with the secretary of state that causes the dissolution of the corporation.

Assumed name/trade name. fictitious name used by a business.

Business assets. The inventory, fixtures, and property owned by the company.

Business licenses. A state or county requires a business license to carry out trade. Each state has its own requirements for issuing such a license.

Business name. The name of the company. A trademarked or proprietary name may not be part of the sale of the business.

Certificate of assumed name, trade name, or fictitious name. A certificate granted by a state authority (usually the secretary of state) that allows you to transact business under a name other than your own.

Certificate of authority. A certificate granted by a state authority (usually the secretary of state) that allows a foreign corporation to conduct business.

Certificate of dissolution. The official certificate issued after a business dissolution. This is available to creditors and vendors as proof the business no longer exists.

Dissolution. Termination of a business's existence.

Employer Identification Number (EIN). A unique identification number issued by the IRS for each business. Used for federal tax returns and other tax purposes.

Final tax returns. The last tax return filed following a business's sale or dissolution. The final return is due the year following the sale or dissolution.

Goodwill. An intangible asset consisting of a business's reputation in the community. Goodwill is an important part of a business sale.

Indemnity. Shifting the responsibility for satisfying losses resulting from liability from one party to another.

Intellectual property. An intangible asset consisting of ideas, trade secrets, patents, copyrights, applications, data, or formulae. These are important parts of a business sale or dissolution.

Involuntary dissolution. A dissolution that corporate shareholders do not initiate. See administrative dissolution.

Limited liability company. A business entity that offers limited liability to its members without being a corporation.

Liability insurance. A type of commercial insurance that protects a business from injuries it causes to third parties.

Liquidation. Collecting assets, converting assets to money, paying debts, and distributing the surplus during the closing of a business.

Notice of intent to dissolve. A document informing the secretary of state that your corporation will be dissolving.

Operating agreement. The contract of terms and conditions for members of an LLC.

Partnership. Two or more people who carry on a business for profit.

Partnership agreement. A contract that partners enter into that sets up the terms of their partnership.

Settlement. In a dissolution, the terms and conditions of the dissolution or reorganization.

Sole proprietorship. Ownership of a business by one person. Sole proprietors may become LLCs by filing the correct documentation.

Voluntary dissolution. A dissolution approved by the directors and shareholders of a corporation, partners in a partnership, or members of a limited liability company.

Winding up. Liquidating a business.

Confused? Get Help Dissolving Your Business from a Legal Professional

Consult an attorney first if you're dissolving your business or about to embark on a new path. The cost of hiring a lawyer may seem too high, but legal professionals save your business time and money in the long run. Find the right business and commercial law attorney near you.

See FindLaw's Closing a Business section for more articles and resources.

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